I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

Saturday, February 29, 2020

To Transform, Trade Ego for Humility

Ten years ago, when the mobile handset wars were in full swing, I wrote a blog analyzing the differences among the leaders in the space. Each had come to prominence in the handset market differently: Nokia was a mobile telephony company, Blackberry a mobile email company, Apple a personal technology company, Google an internet search and advertising company.

With the benefit of hindsight, we know how it played out. Nokia hired a manager from Microsoft to wed the handset business to any alternative mobile operating system to iOS that wasn't made by Google. RIM initially doubled down on their core product, but eventually scotched their proprietary OS in favor of Android. Neither strategy paid off. Nokia exited the handset business in 2013. RIM exited the handset business in 2016. Both companies burned through billions of dollars of investor capital on losing strategies in the handset market.

There has been evidence published over the years to suggest that the self-identity of the losing firms worked against them: interactions via voice call and email had less overall share time on mobile devices, overtaken by emerging interactions such as social media. By providing a platform for independent software development, an entirely new category of software - the mobile app - was created. iOS and Android were well positioned to create and exploit the change in human interaction with technology. Nokia and Blackberry were not.

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Earlier this week, Wolfgang Münchau posited that the European Union is at a cultural disadvantage to the United States and China in the field of Artificial Intelligence. Instead of finding ways to promote AI through government and private sector development and become a leader in AI technology, the EU seems intent on defending itself from AI through regulation. For that to be effective, as Mr. Münchau writes, technology would have to stop evolving. Since regulators tend not to be able to imagine a market differently than it is today, new AI developments will be able to skirt any regulation when they enter the market. It seems to be a Maginot Line of defense.

When it comes to technology, Mr. Münchau writes that the European mindset is still very much rooted in the analogue age, despite the fact that the digital age began well back in the previous century. This is somewhere on a spectrum of a lack of imagination to outright denial.

That begs the question: why does this happen? In the face of mounting evidence, why do people get their ostrich on and bury their heads in the sand? Why does a company double down instead of facing its new competitive landscape? Why does the leadership of a socio-economic community of nearly 450 million people simply check out?

Mr. Münchau points out three phenomenon behind cultural barriers to adaptability.

The dominant sentiment in modern-day Europe is anxiety. Its defining need is protection. And the defining feature of its collective mindset is complacency. In the European Commission’s white paper on artificial intelligence all three come together in an almost comical manner: the fear of a high-tech digital future; the need to protect oneself against it; and the complacency inherent in the belief that regulation is the solution.

What stands in the way of change? Fear. Resistance. Laziness.

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Some executive at some company believes the company needs to change in response to some existential threat. That which got it here will not take it forward. Worse still, its own success is stacked against it. What we measure, how we go to market, what we make, how we make, all of that and more needs a gigantic re-think. Unleash the dogs of transformation.

In any business transformation, there is re-imagining and there is co-option. Wedding change to your current worldview - your go-to-market, your product offering, your ways of working - impairs your outcomes. At best, it will make your current state a little less bad. Being less bad might satiate your most loyal of customers, it might improve your production processes around the margins, but it won't yield a transformative outcome.

Transformation that overcomes fear, resistance, and laziness requires doing away with corporate ego. "As a company, we are already pretty good at [x]." Well, good for you! Being good in the way you are good might have made you best in class for the industry you think you're in. What if instead we took the position, "we're not very good at [x]?" General Electric's industrials businesses grew in the 1990s once they inverted their thinking on market share: instead of insisting on being the market share leader, GE redefined those markets so that no business unit had more than 10% market share. That meant looking for adjacent markets, supplemental services, things like that. It's hard to grow when you've boxed yourself in to a narrow definition of the markets you serve; it's easier to grow when you give yourself a bigger target market. That strategy worked for GE in the 1990s.

Re-imagining requires more than just different thinking. It requires humility and a willingness to learn. From everybody. The firm's capital mix (debt stifles change, equity does not), capital allocation processes (waterfall gatekeeping stifles adaptability), how it sees the products it makes (software and data are more lucrative than hardware), how it operates (deploy many times a day), must all change. That means giving up allegiance to a lot of things we accept as truth. This is not easy: creating a learning organization embraced by investors and labor alike is very difficult to do. But if you're truly transforming, this is the price of admission if you're going to overcome resistance and laziness.

What about fear? Those who truly understand the need to transform will face their deepest fear: can we compete?

In the span of just a couple of years, two deep pocketed firms with healthy growth trajectories introduced mobile handset products and services that eclipsed the functionality of incumbent offerings by 99%. The executive who understood the sea change taking place would not concoct a strategy to fight the battle on their terms. That executive would try to understand what the terms of competition are going to become, and ask if the firm had the balance sheet to scale up to compete on terms set by others.

Mr. Münchau points out that the same phenomenon may be repeating itself among Europe's automakers. They got a late start developing electronic vehicle technology. With governments mandating electrification of auto fleets, the threat is not only real, it's got a specific future date on it. Hence there has been increased consolidation (proposed and real) in the automotive industry in the past decade: an automaker needs scale to develop EV technologies to compete. Those automakers that have consolidated are accepting at least some of the reality that they face: automakers as national champions that create a lot of high-paying industrial jobs struck a balance among public policy, societal interests, and corporate interests for many decades. The change to EV technology is challenging the sustainability of that policy. If the enormity of fighting outdated public policy weren't enough, carmakers moving from internal combustion to electricity also face the transition from hardware to more of a software mindset. The ways of working are radically different.

The firm that truly needs to transform doesn't have the luxury of doubling down on what it knows. It must be willing to give up on long-held beliefs, change its course of action when the data tells it that it must, and face the future with a confidence borne of facts and not conjecture. It must trade ego for humility.